New to stock investing? Consider these steps before you jump in

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The markets have corrected a bit after the long-term capital gains (LTCG) tax introduced by the government in Budget 2018. The jury is still out on whether the correction has ended or if there is more downside expected. In any case, it may be time to start nibbling at some of the stocks you were eyeing to buy. If you are a first-time investor in stocks, probably this is the time to look at start investing.

For, stock markets is one of the best asset classes out there (applies to both direct stocks and equity mutual funds). The Bombay Stock Exchange Sensitive Index or Sensex since the time it was launched in 1986 has clocked a compounded annual growth rate (CAGR) of almost 17%. And, add to that, LTCG on equity was NIL for the most part of the last two decades (for investments held for more than a year) compared to 20% for other asset classes (for three year holding period). Even the short-term capital gains tax on equity is only 15% while other asset classes command taxes at normal tax slab rates for any holding period less than three years.

However, investing in the stock market is easier said than done. You will need the help of a broker, a financial expert or someone who has great knowledge about the market. However, you could do too, if you are game to spend some time on research. It’s simple, as long as you understand how a business works, you can also invest in stocks. You can choose the stocks on your own by gathering a little information available on the internet.

The only thing you need is to understand the financial terms associated with assessing a company. Even that information is available on the internet. Here we tell you in simple terms how to gather information for investing in the stock market.

Make a list

The stock market space is huge. To give you an idea, the Sensex has over 5,000 stocks listed. However, only over 1,000 stocks might be actively traded. So, picking stocks from the list is the first thing that you should do. Understand what your risk appetite is before you choose stocks. This means that you need to understand how much risk you can tolerate.

You will have sleepless nights when the stock you invested in falls by 3-5%? Then, look at large-cap stocks or stocks of blue-chip companies. Won’t be worried even if you suffer losses because you know the market will eventually do well? Then, consider small-cap stocks or stocks of growing companies.

Large-cap stocks have low volatility while small cap stocks are highly volatile. So, the risky stocks (small cap) will go through more ups and downs. Ideally, you can start investing in 2-3 stocks (after listing down 10-12). Once, you are confident about the stocks that you have invested in, you can increase the number of stocks in your portfolio.

Track newsflow

Once you have the list, you can check if the company has been in the news recently. Understand whether the company was in the news for the right reasons. Negative news? Read about it more to understand whether it is temporary. This will help you filter out all the bad stocks on your list.

The next step is to look at the financial performance of the company. Is it making profits? Is it better than its competitors? How about loans it has taken? Are they huge? If the company is making losses and having huge debt, then you should avoid investing in the shares of the company. You can also check to see how good the company’s cash flows are.

Are they paying dividends?

You should understand whether the company is paying dividends to shareholders. If it is, you should look at the dividend payout ratio. This is the percentage of the company’s income that it pays out as the dividend. Here, don’t look for a very high ratio. Typically, companies which declare dividends regularly will have a stable, not necessarily high, ratio. A low but stable ratio over the years is a good sign.

Better than competitors?

Understand who are the company’s competitors and compare the company with those firms. You can check the sales numbers as well as the profits made along with the market share information if it is available. If you think one of the firms in the industry is the best, use that as a benchmark to compare the numbers with that of the company you have chosen.

Read reviews

Everyone today likes to talk about both successful investments as well as those that gave them hardships. Read reviews about the stock online. Talk to people who have invested in the firm to understand if the stock is worth it. Newspapers and magazines also provide information on stocks. You can also look at reports provided by your broker. Always look at the historical prices of the stock to understand how it has performed.

Think all this is too much of work? Then, start by investing in equity mutual funds where the experts manage your money. Once you start investing in funds, you will gain indirect exposure to the stock market and become more confident about equity investing. This is when you can take your baby steps to investing directly in stocks.